Report to Shareholders
Report to Shareholders
When Magee Company began in 2011, the company had the goal of producing top of the line sensors to customers who demand the newest technologies. The firm would do this by manufacturing its product lines at or above the expectations of customers, while still trying to maintain a competitive price within in the market. To gain market share, the company planned to heavily promote its products, while increasing the number of distributors and sales personnel to make products more available.
Despite its plan’s, Magee Inc. was unstable from the beginning. With the exception of year one, Magee Comapny was never able to generate net profits from operations. This stemmed from several issues in poor management decisions. First, Magee management incorrectly believed that profits from its traditional segment could provide sufficient cash to invest in plant and product improvements for the other lines. It is now clear that Magee should have financed the operations through long-term debt. Magee believes that investments in automation could have increased productivity and therefore increase margins on products, as they were low relative to Magee competitors (see Appendix).
Magee Inc. was also unable to gain a significant amount of market share due to poor marketing activities. Initially, the firm priced some products too high, which caused an initial decrease in market share. The lack of marketing management was also a factor in the reduced demand, which left the plant running below capacity. To counter act this, management decided to boost production above normal capacity. Prices were then dropped in an attempt to push product out onto the market, but this action proved futile as only two of its four products had positive margins. Because of these decisions, the firm now sits with nearly $100 million in inventories. To accommodate the inventory production and lack of sales, the firm was forced to take an emergency loan totaling nearly $82 million.
Andrews plans to shut down production this current year, and will begin liquidating assets as soon as possible. In its current state, Magee has nearly $100 million in inventories, which will be sold at or slightly above cost, dependant on the length of time it takes to sell the product. The company will then be sold, either in pieces of as a whole to the Ferris company. For most of Ferris’ products, the firm’s capacity is at or near the maximum, and could be willing to purchase the entire Magee facility (See Appendix). The expected value of Magee capacity is approximately $56 million while the firm still maintains $43 million in other fixed assets.
Total asking price for the entire firm would be about $105, the premium due to all equipment would be in place, fully operational, with trained staff. Magee also has the option to sell capacity in pieces, which could be sold for $50 – $60 million. The remainder of the plant would also be sold for approximately $40 million, or best offered price. In total, Magee would expect to earn between $190 and $205 after liquidation of all assets, both current and long-term. As Magee total liabilities total $150 million, the sale of all property would relieve the debt owed to creditors.
Given the opportunity to reenter the industry, there are numerous changes in strategy and operation that Magee management would do. First, the firm would enter the industry as a broad differentiator, maintaining products in all segments. In order to finance all of the operations, Magee would take on a substantial amount of long-term debt and issue stock. With available cash, the firm would invest in automation to reduce variable costs, expand the capabilities of Magee products, and market their capability widely in an effort to gain the greatest market share.
Once the firm had established cash flow, Magee would make an attempt to produce new products in segments that it is competitive, but differentiated to acquire the market share of customers that find their needs in between currently available products. Another change necessary to survive in the industry would be to carefully monitor and cap inventory. Considering high end products have high materials and labor expenses, holding inventory not only has a carrying cost, but the opportunity cost of not having that cash available was a major player in Magee failing.
Despite the management plans, Magee is currently owes $43 million to its creditors, and maintains about $34 million dollars in inventory in excess inventories.
Subject: Balance sheet,
University/College: University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Date: 31 December 2016
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